Cote Mines Ramp-Up And Robust Gold Prices Will Drive Progress

Key Takeaways

• Expansion of mine production and favorable gold prices are set to boost revenue and earnings growth.
  
• Strategic capital allocation aims to reduce debt and improve shareholder returns, enhancing free cash flows and earnings growth.
  
• Reliance on gold price stability, operational challenges, and growth constraints due to asset acquisition competition, all contribute to uncertainty in future financial performance.

Catalysts

A precious metals-focused royalty company, provides financing solutions to the metals and mining industry.

• The ramp-up of the Cote, Vares, and Borborema mines is expected to significantly increase production volumes, thus boosting revenue growth.
  
• Positive gold price environment with spot prices recently exceeding $3,300 per ounce is expected to enhance both top-line revenue and bottom-line earnings.
  
• Achieving positive free cash flows later in the year through steady production increase and flat operating cost structure is expected to improve net margins and earnings.
  
• The five-year outlook includes a projected increase in gold equivalent ounces to 23,000-28,000 by 2029, a 360% growth, which is expected to drive future revenue and profitability.
  
• Focus on capital allocation for debt reduction and potentially increasing shareholder returns is expected to improve free cash flows and earnings growth.

Gold Royalty Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Gold Royalty's revenue will grow by 61.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from -31.4% today to 22.8% in 3 years time.
• Analysts expect earnings to reach $10.0 million (and earnings per share of $0.05) by about May 2028, up from $-3.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 79.8x on those 2028 earnings, up from -84.9x today. This future PE is greater than the current PE for the US Metals and Mining industry at 20.6x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.12%, as per the Simply Wall St company report.

Gold Royalty Future Earnings Per Share Growth

Risks

• The company remains heavily reliant on strong gold prices, which while favorable now, could be volatile and negatively impact future revenues and profits if they decline.
  
• Operational challenges such as Vares mill output being 38% below budget due to weather and technical issues could lead to inconsistent production and affect revenue and net margins.
  
• The need for ongoing capital allocation discipline due to competitive conditions for acquiring cash-flow assets may constrain growth prospects and impact future earnings.
  
• High variability in longer-term outlooks, especially concerning the Canadian Malartic, Odyssey, and Borborema projects, introduces uncertainty in future financial performance and revenue forecasts.
  
• Trading at a discount to peers despite reported successes indicates possible market skepticism regarding the company’s valuation or growth prospects, which could impede share price appreciation.

Valuation

• The analysts have a consensus price target of $3.11 for Gold Royalty based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $5.75, and the most bearish reporting a price target of just $2.25.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $43.7 million, earnings will come to $10.0 million, and it would be trading on a PE ratio of 79.8x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of $1.62, the analyst price target of $3.11 is 47.9% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.